Journal Article

Corporate Dualism: Applying a Dual-Standard of Liability Under Section 14(e)'s Tender Offer Antifraud Provisions

Bay, Katlyn M

2020

Overview

.220 I. INTRODUCTION The Ninth Circuit Court of Appeals recently diverged from the decisions of five other federal circuit courts in Varjabedian v. Emulex Corp., when the court applied a negligence standard in assessing a claim for material misstatements or omissions in a tender offer under Section 14(e) of the Securities Exchange Act of 1934 (1934 SEA).1 This Note will begin by addressing the purpose of Section 14(e) and by providing a brief overview of the federal circuits' statutory interpretations of the Securities and Exchange Commission (SEC) Rule 10b-5. [...]Part IV will focus on why the application of a dual-standard of liability is more favorable than a scienter standard. \"13 Further, the Supreme Court decided the scienter mental state is required for Rule 10b-5 claims because the Rule incorporates language prohibiting manipulative and deceptive activity.14 The Court reasoned that the extent to which the SEC can regulate \"manipulative or deceptive device[s]\" under the rule-making power of Section 10(b) limits Rule 10b-5 to fraudulent acts entailing an intent to defraud.15 Since 1973, five federal circuits have held that a Section 14(e) antifraud violation in connection with a tender offer requires proof of scienter, as opposed to mere proof of negligence.16 In addressing the 14(e) claims, each circuit focused on the similar language in Rule 10b-5 and the Rule's accepted scienter standard.17 In 1973, the Second Circuit applied a scienter standard of liability to a Section 14(e) claim in Chris-Craft Indus. \"19 The Second Circuit also noted a negligence standard was not appropriate in claims arising under Sections 17(a) or 10(b) of the 1934 SEA.20 In making its decision to require scienter, the court focused on Congress' intent in enacting Section 14(e), which was to promote and ensure informed shareholder voting in the case of tender offers.21 In that case, in response to Chris-Craft issuing a tender offer to purchase Piper stock, Piper sent a letter to its shareholders discouraging the offer because it was not in the company's best interest.22 Piper then agreed to an exchange offer with Bangor Punta Corp. before issuing a press release outlining the exchange offer.23 Accordingly, Chris-Craft brought a private right of action against Piper and Bangor Punta Corp. under Section 14(e) and Rule 10b-5, claiming the letter to Piper stockholders and the press release contained material misstatements.24 The court held that both Piper and Bangor Punta Corp. violated Section 14(e) because the shareholders were entitled to accurate information adequate to make an informed decision regarding the Piper family's personal recommendations.25 In the following year, the Fifth Circuit also applied a scienter standard to a Section 14(e) claim in Smallwood v. Pearl Brewing Co26 In that case, the court stated a degree of culpability that exceeds mere negligence is required in cases alleging violations of Rule 10b-5.

• Publisher: University of Iowa, College of Law
• Subject: Federal court decisions / Fraud / Liability / Negligence / Proxy statements / SEC 34 / Securities fraud / Shareholder voting / State court decisions / Stock exchanges / Stockholders / Tender offers / Violations